Steelmakers hope special products can save them from Chinese onslaught

The announcement that India's Tata Steel is abandoning Britain has hammered home the threat to developed countries' steel industries from a glut caused by over-capacity in China.Reuters | April 02, 2016, 22:40 IST

MANILA/LONDON: Steel producers in high-cost countries say their best hope for surviving the global glut is to develop higher value specialised products.

But they will still face a tough time competing with low-cost Chinese producers that are breathing down their necks.

The announcement that India's Tata Steel is abandoning Britain has hammered home the threat to developed countries' steel industries from a glut caused by over-capacity in China, which has led to a collapse in the global price of commodity steel used mainly in construction.

Firms from Europe, Japan and South Korea say they are trying to keep afloat by increasing the share of higher-value products in their output, focusing on specialty steels used mainly in manufacturing, which command a premium over lower grades.

Some companies are venturing further down the supply chain to make their own aircraft or auto parts.

Others are forming tighter relationships with their customers as a way to keep their order books full.

"Sticking to technological and quality leadership will be the only solution for European steel producers to secure profitability and future growth," said Wolfgang Eder, CEO of Austrian steelmaker Voestalpine..

Voestalpine is aiming to become less dependent on traditional steel markets by raising its production of finished parts for the aerospace, rail and automotive industries. The auto sector alone generates around 30 percent of group sales.

Firms from Europe, Japan and South Korea are trying to keep afloat by increasing the share of higher-value products in their output, focusing on specialty steels used mainly in manufacturing.

"Given the cost structure that European steelmakers are facing, they will not be able to produce steel commodities in competition with countries such as China, Russia, Turkey or Ukraine in the long run," Eder added."Energy,labour and regulatory costs in Europe have reached a level at which mass production has become utterly unattractive."

But the strategy may not be a permanent solution to the crisis that has caused plant closures around the developed world.

Making specialised high-end steel still requires huge, capital-intensive smelters that mostly produce the lower value commodity material. And China, which now produces half of the world's steel, is developing more sophisticated production of its own.

Paul Gait, an analyst at Bernstein, said Voestalpine's strategy means the company "essentially provides an engineering service, a solution to a manufacturing process. It is not just selling steel."

But even at a high level of sophistication, the Chinese can catch up.

"Specialty steels will help Voestalpine survive for a few years, but eventually the Chinese will probably be able to produce the more bespoke, more tailored steel," Gait said.

High value specialty products by themselves can't save European steel, says European steel association Eurofer, which wants Brussels to do more to protect the industry from what it says is dumping by China.

To be cost effective, a steelmaker still needs to produce large quantities of the lower-margin commodity product, and needs a market for it.

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